Ongoing Mifir Review and regulatory complexity is harming liquidity in Europe, says AFME

Industry association warns regulators that the ongoing Mifir Review could risk holding back EU equity markets; is calling for a diverse range of trading mechanisms in Europe.

The Association for Financial Markets in Europe (AFME) has issued a warning on the state of liquidity in Europe and the negative impact the ongoing “complex” Mifir Review could have on the bloc’s already suffering markets.

After years of back and forth, Trilogue is set to begin on Tuesday, bringing together the European Council, Parliament and the Council of the European Union to hash out new Mifid regulation around double volume caps (DVCs), the consolidated tape, midpoint trading and payment for order flow (PFOF) among other topics.

In a statement, AFME has attributed Europe’s stagnant equity turnover to fragmented markets and a highly complex framework – equity turnover in the US rose 40% between 2016 and 2022 while it remained completely flat in Europe during the same period.

“The Mifir Review can still be an opportunity to enliven EU market structure, promote meaningful transparency and revamp liquidity in Europe,” Giulia Pecce, head of Mifid policy at AFME told The TRADE.  “However, Europe’s international attractiveness and competitiveness is dangerously at risk from the current level of regulatory complexity and arbitrary restrictions in place.”

A final version of MEP Danuta Hübner’s report, originally drafted in July last year, was approved by European Parliament’s Economic and Monetary Affairs Committee (ECON) in February, finally pushing the text into the Trilogue negotiations.

Among the proposals is a pre- and post-trade consolidated tape and a suggested “simplification” of the double volume cap (DVC) mechanism with the deciding vote to be left with ESMA using an evidence-based approach. Also to be debated in Trilogue is the use of midpoint trading on quasi-dark venues systematic internalisers (SIs).

The DVC and the systematic internaliser regime have proved to be some of the more contentious topics in Europe with policymakers and members of the European Parliament favouring a more restrictive approach to trading outside of the lit markets. This has contrasted HM Treasury and the FCA in the UK who removed restrictions on dark trading to foster new interest in the city post-Brexit.

In its letter, AFME implored regulators in Europe to ensure a variety of trading mechanisms remain in place as “the backbone of a healthy vibrant market”.

“As inter-institutional negotiations begin, AFME is urging policymakers to keep the attractiveness and liquidity of EU markets at the forefront of its considerations,” said AFME’s chief executive officer, Adam Farkas in the statement.

“We must ensure that sufficient choice in trading mechanisms remains to attract investment within and into Europe. Here again, the EU’s geographically fragmented equity markets and its complex regulatory framework risk holding the bloc back from making policy choices that could benefit the EU overall. It is critical the co-legislators continue to recognise the important role that banks’ systematic internalisation plays in the liquidity ecosystem.”

Read more in-depth coverage of the Mifir Review and its current state of play in The TRADETech Daily 2023 tomorrow.